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A Semi-Nonparametric Approach to the Demand for Money in Pakistan

Author

Listed:
  • Haroon Sarwar
  • Zakir Hussain

    (University of Sargodha, Pakistan.)

  • Masood Sarwar

    (University of Sargodha, Pakistan.)

Abstract

The degree of substitutability of different monetary assets serves as a valuable source of information for Pakistan’s monetary authorities in the context of money demand analysis. Barnett’s (1980) concept of the micro-foundations of money demand has paved the way for a more comprehensive demand system analysis. Locally flexible functional forms are unable to estimate substitution elasticities at all data points, and thus, we use the asymptotically ideal model, which is a semi-nonparametric globally flexible functional form. Our data on income, price, and substitution elasticities show that there is less-than-perfect substitution among monetary assets. The results of Allan and Morishima elasticities show that the former are inherently biased toward showing monetary assets as complements, making Morishima a better choice. The study recommends that it is high time Pakistan’s monetary authorities abandoned the simple-sum aggregation method, which assumes perfect substitution among monetary assets.

Suggested Citation

  • Haroon Sarwar & Zakir Hussain & Masood Sarwar, 2011. "A Semi-Nonparametric Approach to the Demand for Money in Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 16(2), pages 87-110, Jul-Dec.
  • Handle: RePEc:lje:journl:v:16:y:2011:i:2:p:87-110
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Substitution; semi-nonparametric; globally flexible; Morishima elasticity.;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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